Biden has a “Plan B” for paying off student debt. How does this work.


The Biden administration is pushing another way to fight the student debt crisis, and its main initiative, a plan to forgive up to $20,000 in student loans per borrower, remains. reached a legal dead end.

Even if the courts halt efforts to forgive the debt, the Education Department’s Plan B could help millions of borrowers by revising income-based repayment plans. It also addresses some of the worst pitfalls of student debt, such as “negative amortization,” or someone’s loan balance continuing to grow despite their regular payments.

There was a planned reform of Income Conditional Repayment Plans, or IDRs was published for the first time in August but has been overshadowed by the Biden administration’s plan to forgive up to $20,000 in debt per borrower. But the debt relief program stalled due to legal challenges and has now gone to the conservative-leaning Supreme Court — the Education Department said it is moving forward with another part of its plan, which will revise the IDR. The goal is to help low- and moderate-income borrowers.

Overhauling the IDR is “very important,” Persis Yu, deputy executive director of the Student Borrower Protection Center (SBPC), a debt advocacy group, told CBS MoneyWatch. “We see a lot of borrowers saying, ‘I don’t understand, I took out $15,000 and now I owe $40,000,’ and it’s emotionally draining and financially stressful.” IDR “used to work in a very toxic way,” he said.

You should know this.

What are income-based repayment plans?

Income-based repayment plans are designed to make managing student loans easier by bringing a person’s monthly payment closer to their income. According to Pew Research, about one-third of all borrowers are enrolled in IDRs.

But critics have pointed out that the IDR has major flaws. First, there are four such plans, each of which has its own rules and criteria, which may confuse borrowers. Worse, the plans have been criticized for allowing student debt to grow through negative amortization, with the SBPC report noting that some borrowers have doubled or tripled their college loan obligations despite a repayment plan.

Negative amortization occurs when repayments are insufficient to cover the interest on the loan, meaning unpaid interest is added to the principal amount of the loan, which can then go into the snow regardless of the borrower’s repayments. .

What will happen to the IDR under the Biden plan?

Biden administration officials said Tuesday that they would first cut three of the IDR plans and focus on one program aimed at simplifying and making them more generous. The plan expected to remain is called the Revised Pay As You Earn, or REPAYE, program, first introduced in 2016.

What will change in REPAYE?

The Biden administration wants to overhaul the REPAYE plan through a series of regulatory proposals to be published in the Federal Register on January 11.

As part of the proposed regulatory changes, REPAYE will increase the amount of income protected against debt repayment. Currently, enrollees must make payments equal to 10% of their discretionary income, which is set at incomes above 150% of the federal poverty guidelines. This means that only $20,400 of income per borrower is considered non-discretionary and therefore protected from IDR plans.

The proposal would increase the amount of nondiscretionary income for single borrowers to about $31,000, or 225% of the federal poverty level. This means that more of the borrower’s income is protected against debt repayment, leaving more money for necessities like rent or food.

Borrowers in families of four will be protected under the new guidelines with incomes below $62,400, the Education Department said.

The proposal would also halve the discretionary income interest that borrowers must pay from the current 10% to 5%.

What happens to unpaid interest?

This proposal eliminates the problem of negative amortization, or the application of unpaid interest to a borrower’s balance.

About 7 out of 10 IDR plan borrowers saw their balances increase after they joined the plans, the Education Ministry said on Tuesday.

“Under the proposed plan, the borrower’s monthly payment will continue to be applied to the interest first, but if it is not enough to cover the amount, the remaining interest will not be charged,” the ministry said. In the press release of the Department of Education.

Does this affect loan forgiveness?

The proposal also makes some changes to loan forgiveness, shortening the time it takes for people with student debt to receive relief.

Current plans promise to eliminate any remaining debt after 20 or 25 years of payments. The new rules will wipe out those who borrow $12,000 or less after 10 years. A year is added for every $1,000 borrowed beyond that.

The change could help college graduates, the Department of Education said. He estimates that 85% of college borrowers will be debt-free within 10 years of entering the IDR program.

How much does all this save borrowers?

The typical graduate of a four-year college will save about $2,000 a year over current plans, the Education Department says.

He said on average, low-income borrowers would see the biggest relief, with lifetime payments per dollar dropping an average of 83% for borrowers in the bottom 30% of income. By comparison, 30% of earners will see their payments drop by 5%.

What are the estimated costs to taxpayers?

According to the Committee for a Responsible Federal Budget, a public policy group that advocates for reducing the national debt, the overhaul of IDR plans could cost as much as $190 billion.

The group called the proposal “costly and wrong” in a statement on Tuesday. Among its critics are the program’s price tag, which could eventually raise tuition and encourage more Americans to take out loans to finance their college educations.

The public can comment on the Biden administration’s proposal for 30 days at

When will the changes take effect?

The Department of Education has said it expects to finalize those rules later in 2023 and believes some rules could be introduced later in the year.

— According to the Associated Press agency.

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